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GSU ECON 2105 - Flip Ch 14

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Slide 1Money Money MoneyMoneyWhat is money?Roles/Functions of MoneyRoles/Functions of MoneyTrue/False) US $ is a commodity backed money.Types of MoneyHow much money does US has?Monetary Aggregates, August 2008How much money does US has?What happens to M2?Bad Bank – Planet MoneyFractional-Reserve BankingFractional-Reserve BankingFractional-Reserve BankingMoney CreationHow Banks Create MoneyHow Banks Create MoneyMoney MultiplierThe Money Multiplier in RealityMonetary Base 1980 - 2013M2 1980 - 2013QuestionQuestionQuestionThe Federal Reserve SystemWhat the Federal Reserve Bank does?Ch 14. Money, Banking and the Federal Reserve SystemMoney Money MoneyMoneyWhat is money?Money is any asset that can easily be used to purchase goods and services.As a Legal TenderCurrency in circulationCheckable bank depositsThe money supply is the total value of financial assets in the economy that are considered money.Roles/Functions of MoneyA medium of exchangeA store of valueA unit of accountQuestion 1) Tuition in Spring 2014 is $3,000. Money is used as a _______.Question 2) Yahoo acquired Tumblr in $1.1 billion. Money is used as a ____.Roles/Functions of MoneyA medium of exchangeA store of valueA unit of accountQuestion 1) Tuition in Spring 2014 is $3,000. Money is used as a _unit of account______.Question 2) Yahoo acquired Tumblr in $1.1 billion. Money is used as a _medium of exchange___.True/False) US $ is a commodity backed money.Types of MoneyCommodity money A commodity-backed moneyFiat moneyHow much money does US has?Currency in circulation = $700 billion, Checkable deposits = $600 billion, Traveler’s check = 6 billion, Savings deposits = $4000 billion, Time deposits = $1000 billion, Money market funds = $1000 billion.Question 1) What is M1?Question 2) What is M2?Monetary Aggregates, August 2008How much money does US has?Currency in circulation = $700 billion, Checkable deposits = $600 billion, Traveler’s check = 6 billion, Savings deposits = $4000 billion, Time deposits = $1000 billion, Money market funds = $1000 billion.Question 1) What is M1?M1 = Currency in circulation+ Checkable deposits +Traveler’s check =$700 billion+ $600 billion+6 billion = 1306 billionQuestion 2) What is M2?M2 = M1 + Savings deposits+ Time deposits+ Money market funds = $4000 billion+$1000 billion+ $1000 billion = 6,000 billionWhat happens to M2?Dr. Grace was cleaning her library, and found $100 from her old textbook. She deposited $100 into her saving account. What happens to M2 due to her $100 deposit?Bad Bank – Planet Moneyhttp://www.thisamericanlife.org/Radio_Episode.aspx?sched=1285Feb 27. 2009 #375: Bad Banks (3:30 – 8:30)Fractional-Reserve BankingThis T-Account shows a bank that…accepts deposits,and lends out the rest. Bank’s capital (banker’s Money)Assets LiabilitiesAdam’s BankLoans (MortgageLoan)$91.00Deposits$90.00Total Assets$100.00Total Liabilities$100.00Capital$10.00Reserves $9Fractional-Reserve BankingQuestion) What is Reserve Ratio of this bank?Assets LiabilitiesAdam’s BankLoans (MortgageLoan)$91.00Deposits$90.00Total Assets$100.00Total Liabilities$100.00Capital$10.00Reserves $9Fractional-Reserve BankingQuestion) What is Reserve Ratio of this bank?Reserve Ratio=Reserve/Deposit= $9/$90 = 0.1OR 10%Assets LiabilitiesAdam’s BankLoans (MortgageLoan)$91.00Deposits$90.00Total Assets$100.00Total Liabilities$100.00Capital$10.00Reserves $9Money CreationQuestion) Dr. Grace found $1,000 cash hidden in her old textbook. She deposited $1,000 into her checking account. How much money supply changed? (Reserve Ratio = 10%)How Banks Create MoneyAssets LiabilitiesFirst BankReserves$100.00Loans$900.00Deposits$1000.00Total Assets$1000.00Total Liabilities$1000.00Assets LiabilitiesSecond BankReserves$90.00Loans$810.00Deposits$900.00Total Assets$900.00Total Liabilities$900.00Money Supply = $1000 + $900 = $1900.00!How Banks Create MoneyMoney MultiplierChanges in Money supply (ΔM)= $1,000 + 900 + 810 + 729 …= $1,000 x (1/0.1)= $10,000ΔM = (1/Reserve Ratio) × ΔMonetary Base Money Multiplier = 1/Reserve RatioMoney Multiplier = 1/Reserve RatioThe Money Multiplier in RealityThe monetary base is the sum of currency in circulation and bank reserves.The money multiplier is the ratio of the money supply to the monetary base.Monetary Base 1980 - 2013M2 1980 - 2013Question1. Reserve Ratio = 5%, What is money multiplier?2. Monetary base went up by $1000. How much is money supply change?Question1. Reserve Ratio = 5%, What is money multiplier?Money multiplier = 1/0.05 = 202. Monetary base went up by $1,000. How much is money supply change?ΔM = 20 x $1,000 = $20,000QuestionWhat is the name of central bank of U.S. economy?The Federal Reserve SystemWhat the Federal Reserve Bank does?Supervise and regulate financial marketMonetary PolicyOpen Market Operation (Q.E.)Reserve requirementDiscount


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GSU ECON 2105 - Flip Ch 14

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